Still waiting for that new road to come your way?

Anyone who has ever been to the Central African Republic (CAR) knows that the country has huge infrastructure needs after years of internal turmoil and strife. But when you look up how much of the government’s investment budget actually was implemented and financed infrastructure development in 2009 for instance, you find a stunningly low execution rate of 5 percent.

Yes, only 5 cents on the US dollar inscribed in the domestic investment budget was actually ever used to finance development. What does that imply? Well, to start with, it tells us that focusing efforts on budget planning—getting a sustainable medium-term budget plan—is only worth anything if we can be reasonably sure that the budget is also then executed. It also tells us that the results we associate with the budget plan are elusive if execution does not follow. In other words, a new road may be inscribed in the investment budget over and over again, but never be built. This "budget execution deficit" can hold countries back from meeting growth aspirations.

It does not necessarily mean governments are not interested in budget execution, but they just may face external and internal constraints. In fact, various reasons may be behind the observed execution deficit -- in some cases revenue volatility may create financing problems, and we know from studies that government revenue shortfalls result primarily in cuts to investment spending. But government systems for public investment management also have a very important role to play in increasing execution rates.

The "budget execution deficit" was the subject of one of the World Bank Africa Region's Annual Meetings seminars on October 7—Eliminating the Budget Execution Deficit. The seminar involved South-South exchanges between policymakers from Africa, Vietnam, and China. The debate showed the various facets of the budget execution problem—and also the different lessons learned by countries seeking their own development path. Here are some of my take-home lessons from the discussions.

First, it was evident that to fully execute budget plans, non-concessional resources, resources with commercial or near commercial interest rates, may have a role to play. Certainly this would be the case in countries that have exhausted their ability to mobilize more domestic tax resources and concessional financing options such as aid, but still have vast infrastructure needs and have borrowing headroom. Those non-concessional funds could be of domestic and foreign origin, and one way to attract them may be in the form of public-private partnerships.

Second, as the Vietnamese panelist put it, what is being done with the resources is more important than obtaining them. Here, the Chinese experience is of interest as a model where as part of the initial push, infrastructure investments were heavily focused in the coastal special economic zones. As the economy began to take off, public infrastructure investment spending rose quickly and was spread to other areas of the country, a push that also came with challenges of ensuring quality and limiting corruption. In this regard, non-concessional financing associated with the investment also ensured discipline as it required that these investment yield sufficient returns to raise the financing and service the debt. The panel discussion also revealed different choices, with China relying almost exclusively on public funding for key infrastructure, whereas Vietnam has been more strongly working on attracting private-public partnerships.

Third, based on all this, how can governments upgrade their systems to put resources to good use and accelerate execution? In this area, the World Bank has been building expertise—and recently organized a conference in Hanoi to exchange lessons learned—using a diagnostic framework for public investment management. Findings of this initiative across a range of countries suggest that a lot of efforts in the past have been focused on improving appraisal processes, the initial phase of determining whether a project is theoretically desirable, whereas the bottleneck in many cases remains implementation. This suggests that high payoffs are more likely if the focus is put on implementation processes first. In addition, finding a simple way to rank projects and to keep bad projects out of the budget can help overcome vested interests and reduce wastage.

The bottom line—if you are tired of waiting for that road to come to you— is this: ask for better public investment management, notably: (a) make sure the budget is financed, from internal and external sources, in a sustainable manner; (b) find out what the strategic investment areas are to boost your countries growth prospects; (c) help the government focus on tackling the implementation bottlenecks for public investment, including by involving monitoring mechanisms outside government; (d) find a simple and rules-based way to keep that "lemon" project out of the budget altogether. Only when we close that "budget execution gap" will we also close the development gap.

Comments

Very interesting insights indeed. The issue at hand is an important one. In Nigeria, the situation is not as bad as in Chad - in 2009, the capital budget execution rate was 60 percent as at December (before the financial year was extended to March). This has been considered too low by Nigeria's own standards such that for the past two years, the Budget Office of the Federation has been organising an annual workshop on budget implementation, drawing participants from within Government, National Assembly, Civil Society, Academia, and the Media. At the end of the workshop, a communique is issued. This year's communique contained 16 recommendations! Interestingly, the first recommendation was about involvement of stakeholders in the preparation, implementation, and monitoring of the budget.
It is interesting to hear that financing investment using non-concessional resources can be a key factor in ensuring that infrastructure projects are fully executed. But in practical terms, what critical mechanisms did the countries which used non-concessional resources actually put in place to fully execute their projects? Is it that monitoring (whether by government officials or third parties) was more rigorous? Other countries can then try to put in place the same mechanisms, even if they are using their own or concessional resources.

5 per cent investment budget execution rate! Unfortunately I do not know too much about CAR, and I am curious to know what could have been responsible for this - revenue constraints or poor public investment management? But I strongly agree with the point that third party monitoring mechanisms for budget implementation are an important tool for improving budget execution.